Monday, September 21, 2009

Sprouting Seeds

My friend, the SBIR Coach, recently posted reflections from attending the Conference of the National Association of Seed and Venture Funds (NASVF). He mentioned a recent conversation he had with Laurence Briggs, CEO of a private investor network:
What they look for is a proved-out concept for a product or solution addressing a significant market with scalability, and a good coachable team appropriate for their stage of development.
I read those words, and wonder at the first requirement for private investment: a proved-out concept. The image that comes to mind, reasonably enough I presume, is that of a seed, for a seed undoubtedly predates such proof.

Last I checked my botany, a seed by itself is anything but proved-out, especially the seed of a new hybrid or an untested variety. But what a wonderful package it is! All potential and for explosive growth at that. A seed is quite resilient, enduring a great many torments, even years of neglect. But a seed needs a few things to realize that potential.
  1. A seed needs warmth and moisture to sprout, which provides proof of its viability.
  2. But a viable seed may still die without the proper nurturing. Once we've obtained proof of viability, the seed needs the suitable conditions to root and leaf and grow. This is the testing stage, where a viable seed is coaxed into a relatively mature specimen, a prototype if you will of the field or forest it might become. Now we have a plant, but what sort of fruits will it produce?
  3. If a mature specimen warrants our further interest, we need to attend to the task of reproducing it, distributing it, continuing to examine and study it to discover the ideal conditions and create them in field or farm or greenhouse.

You may notice something in the image: It mirrors the process of seed capital as represented by SBIR.

  1. Phase I is the seed-sprouting stage, where we take an unproven concept and prove it out.
  2. Phase II is the stage where a viable seed is taken to prototype.
  3. Phase III is the stage where a prototype is brought to commercialization in a broader market.

It would seem then that Phase I, the true seed stage, is the untouchable part to private investors. The greatest value of SBIR is its ability to leverage public funding, through a highly competitive process to identify the most promising kernels of ideas, along with the appropriate team to take it from unproven concept, through proof, prototype, then commercialization.

If SBIR is transformed--as many in the House Small Business & Science Committees are intending and entrenched to do--to preference the later stages of business development and growth (the stages preferred by Angels and VCs), then what source would remain for the true seed stage of innovation?

Some might argue that seeds are in too great abundance to be sorted by non-experts. Surely, it is the risk factor involved that stays many Angels and VCs from entering the fray at this early stage. Yet innovative science and technology take time, sustained effort, and commitment: often more of these three than most realize or would care to support.

This is perhaps the genius of SBIR: it allows Program Managers to define high priorities for their particular programs, to solicit proposals that address those specific priorities, have these proposals evaluated by experts, if not experts in the fields of research at least expert in the problems that need resolution. It permits federal agencies that spend billions of taxpayer dollars to reserve a small portion of those funds for work by small businesses, to serve the greater good, to stimulate innovations that might otherwise sprout and die on the sidewalks of neglect and indirection, ones which large corporations and universities have not or could not achieve.

It focuses the minds of innovative researchers to solve realworld problems, fertilizing the growth of the entrepreneurs who will create and lead new industries built on new technologies that remain unimaginable today. Innovation by definition has no peers. Again, I ask, if SBIR will no longer support this earliest stage, then who or what will?

Friday, September 4, 2009

Nota Bene: we judge small businesses differently

First, a disclaimer: my firm currently has an SBIR Phase I proposal under review at the NSF, submitted in early June, for which, if selected, the author of this post would serve as PI. That said, I respect the integrity of the process and trust that my comments here should have little to no bearing on the merit review of the proposal, either positively or negatively.

The NSF website prominently notes:
Consideration of proposals usually requires up to six months.
From the viewpoint of a small business seeking support for R&D, I would welcome the passage into law of §204 (3) (B) of H.R. 2965 EAS :
...a final decision on each proposal shall be rendered not later than 90 days after the date on which the solicitation closes unless the Administrator determines, on a case by case basis, that a decision may be extended from 90 days to 180 days
That's old news (though we still await the final version of the SBIR/STTR Reauthorization Act)! What caught my eye today however was a passage on the NSF website, from their instructions to the Phase I Technical/Commercial Peer Review Panel. Here it is verbatim [emphasis theirs]:
(N.B.,SBIR/STTR INTERPRETS THE NSF CRITERIA SLIGHTLY DIFFERENTLY THAN THE REST OF THE FOUNDATION BECAUSE WE ARE LOOKING AT RESEARCH THAT IS CLOSE TO PRODUCING A MARKETABLE PRODUCT (i.e., "Advanced Applied Research,") NOT BASIC RESEARCH. The science/engineering entailed in the project may be well understood; the novelty may lie in the application.)
Interesting use of the word may there. What if... let's be radical here... what if the science and engineering were cutting edge, rather than "well understood" despite its origin in a small business, rather than a university? What if the novelty lay not merely in the application, but in the approach itself? Let's just say it does. Let's just posit the possibility that a small business enterprise might be truly innovative. What then?

I'd like to think that my firm fits that latter description, because frankly it doesn't well fit the former. The science and engineering is not well understood (at least not outside my company), because it's novel. I have argued on this blog rather passionately for seed-stage funding through SBIR and perhaps other mechanisms. I admit this passion is in part self-interest. Seed funding is hard to come by.

VCs and others are aligned to invest in businesses "close to a marketable product," but not, as it turns out, in potentially transformative but yet unproven ideas. Why should NSF SBIR fill that same niche, when true seed funding is remarkably scarce? Does the cited guidance to NSF technical reviewers hint at a presumption that small businesses are not capable of scientific innovation?

The requirement is well established that SBIR applicants must justify their proposals with a strategy toward commercialization (which already distinguishes SBIR from other NSF programs). It is a requirement that we in the small business community embrace. The guidance seems to go beyond that however. It is not merely asking for commercializability, but in essence preferencing later stage efforts over early-stage R&D, but doing so merely for small businesses, asking us to compete not to a higher bar, but on another track.

How different from the stance of the DoD :
Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.
What leads to such disparity by different agencies both authorized to fund innovative research by small businesses? Let us only hope in the end that innovation leads, not guidance.

Thursday, September 3, 2009

Who wants to be average?

The August 27th issue of The Economist leads with an article on the return of the corporate giant. Here is a pithy bit from the article:
You might suppose that the return of the mighty, now better equipped to crush the competition, is something to worry about. Not necessarily. Big is not always ugly just as small is not always beautiful. Most entrepreneurs dream of turning their start-ups into giants (or at least of selling them to giants for a fortune).
I'd like to parse that out a little bit. Let's do a little editing, shall we? Take the statistical sentence: most entrepreneurs. Hmmm. Let's, do let's take out that "most" and replace it with... average... or better yet run-of-the-mill. Yeah, that's the ticket:
Average, run-of-the-mill entrepreneurs follow the pattern that is often fed to them (like fattening of ducks for foie gras), accepting that the ultimate goal of all passion, innovation, and drive is TO EXIT from their dreams, eventually selling their start-ups to corporate giants.
Unusually, perhaps (but then, who wants to be average?), I am an entrepreneur to PURSUE those passions, drive, and innovations, rather than to escape from them. My motivation is transforming what is in the world into what might be. Funny, take that sentence: you won't notice any reference to small investment or large payout.

Sure, I'm interested in developing practical products and applications for my innovations, and indeed in profiting from them, but the profit motive is incidental to the innovations and their contribution to real-world needs. If my firm balloons into a giant, I only hope that it maintains its core of passion, drive, and innovation. I don't prejudge whether or not it might one day be sold to a giant or other investor. An exit just isn't top on my priorities.